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Canadian banks have been hitting the gas on auto loans, leaving consumers and the financial institutions more vulnerable to risk if the economy takes a sudden turn, according to a new report from Moody’s Investors Service.

Growth in auto loans has outpaced that of mortgages, credit cards, and personal lines of credit over the last seven years, according to the report, released Thursday.

The amounts are getting larger, and the amortization periods are getting longer, adding debt to the already heaving burden faced by Canadian households.

In general, consumers have been diligently making their payments. But if a sudden shock hits the economy, causing a big bump in unemployment, borrowers could be in a squeeze. When some default, the banks will be left holding the bag.

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“As long as the Canadian economy is coming along, that’s fine, but if we were to get an employment shock of some sort, we could see a very different outcome with the Canadian banks and with consumers as well,” Jason Mercer, analyst and assistant vice-president at Moody’s in Toronto, said in an interview.

Since 2007, the compounded annual growth rate of bank auto loans has been 20 per cent, the report said.

Much of that is largely due to consolidation in the industry, Moody’s said. Royal Bank of Canada, for instance, became Canada’s biggest player in auto loans when it acquired Ally Financial Inc. in a $4.1 billion (U.S.) deal in 2012.

In addition to RBC, Toronto-Dominion Bank and Bank of Nova Scotia have all publicly discussed their plans to strategically position auto lending as a high-growth product in their domestic operations, Moody’s noted.

In addition, low monthly payments, made possible by low interest rates and longer amortization periods — sometimes as long as eight or nine years — “are encouraging consumers to purchase more expensive vehicles, increasing the consumer debt burden,” the report said.

TD, the one bank that breaks out its consumer auto portfolio separately in its financial statements, reported that loans with a term of greater than five years grew to 33 per cent from 22 per cent of the total lending portfolio in 2013 from the previous year, Moody’s noted.

The longer loan terms mean that the repayment period far outpaces the vehicle’s depreciation. “The loan is underwater much longer and prolongs the borrower’s debt burden,” the report said.

For consumers who are still making payments on a vehicle that they trade in, the dealer may be able to set up financing that rolls the amount still owed into the next loan — in some cases up to 135 per cent of the value of the new vehicle, Mercer said.

“You get this snow-ploughing of negative equity into future loans. Until the consumer finally pays off that loan, that becomes a growing problem.”

The current household debt-to-income ratio of 166 per cent is nearly double that recorded prior to the last severe recession in 1992, when unemployment peaked at 11.7 per cent, Moody’s noted.

“If we were to have a severe recession, delinquency rates would definitely rise. Because consumer indebtedness as a proportion of income is much higher than it was in 1992, there’s a greater vulnerability,” Mercer said.

It’s difficult to quantify the potential impact on specific banks because auto lending is lumped into the personal lending, Mercer said.

Canada’s banking system is rated among the most stable in the world, said David Beattie, analyst and senior vice president at Moody’s in Toronto.

Still, high consumer leverage and elevated housing prices are the two major downside risks to the Canadian economy, Beattie said.

“Any time you have leverage, it leaves you less able to respond to external shocks. We don’t know where the next external shock will come from but if you’re leveraged going into a downturn, you have less room to maneuver.”

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